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How to Improve Small Business Profits by Reducing Waste

During 3.5 years on the road as a consultant, I consulted over 126 small businesses including contractors and other service companies. To find savings, I looked to reduce waste. As clients had already identified obvious waste, my recommendations were based on small savings that added up.

For example, with contractors, I usually found waste in company tools. Crews often see it as too much trouble to recover and sort the scrap or to search for a tool they misplaced.

This type of waste adds up. For instance, one client had 14 field employees. My client said annually they spent $1,400 replacing lost stakes plus $3,000 replacing lost tools.

Typical Small Business Profit Percent While $4,000 in tools and stakes doesn’t sound impressive, look at it from a different perspective. Having analyzed over 100 client profit and loss statements, I found the average small business netted less than 5% profit before taxes and interest. Many lost money, typically 5% to 10% in one of the last three years.

Impact of $4,400 Depends on Your Profits Clients and their employees both assume it’s only $4,000. Here’s why it’s way more than $4,000. On any sale, only a small portion of the sale is profit. Look at this P&L for example:

Here’s the point. You can only buy something to replace what you lost out of profit, not the gross sale. This example shows you that $950,000 out of $1,000,000 revenue paid for labor, materials and overhead, such as office help, phones and other utilities, rent, insurance, Workers Compensation, and taxes.

Calculating Impact If your net profit is 5%, then to have the money to replace the wasted $4,000, you will need to earn an additional $80,000.

Charge him your cost for any of the tools and equipment not returned safely unless he can show someone else signed the missing items(s) out on a Sign Out Sheet

If someone else signed to be responsible, then charge that person instead

You can also have a required list of their own tools laborers must bring to work. This will minimize the tools you need to provide.

As cleanup is part of the job, you not only minimize the waste if they do the clean up properly, you will have a happier customer. People hate having to clean up after they paid for work on their property. Numerous service businesses have similar issues so it’s not limited to construction.

Sometimes the impact of waste is not obvious. You can improve your small business profits by reducing waste such as lost tools and stakes. The example above covered $4,400 in misplaced equipment, which is $4,400 in lost profit. This number becomes more significant when you look at $80,000 in additional sales to pay for this waste.

More from this contributor:First Person: Calculating the Cost of Wasted Labor First Person: Are Your Labor Costs Higher Than You Think? First Person: The Invisible Thieves That Cause Inventory Shrink